The widely-watched US “yield curve” has hit a new 11-year low as traders gird themselves for the Federal Reserve raising interest rates at its upcoming meeting later this month, and start to factor in slower economic growth in 2019.
The yield curve consists of slope made up of yields of Treasury bonds of various maturities. Typically, it costs more for countries to borrow for 10 years than two years, so the curve usually slopes upwards.
But when short-term borrowing costs rise above long-term ones, it indicates that monetary policy may be too tight. Depending on how you measure it, the US yield curve has “inverted” ahead of every recession since WWII, making it a widely-followed market indicator for the economy.
The recent market ructions has eased upward pressure on Treasury yields, and led traders to price in fewer Fed interest rate increases in the coming year. But the US central bank lifting interest rates by another quarter point later in December is widely expected, pushing the spread between two and 10-year Treasury yields to 18.29 basis points on Monday, the lowest since July 2007.
The spread between 12-month Treasury bills and the 10-year note yield also fell below 30 bps for the first time since the autumn of 2007.
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